When the future is uncertain, and the challenge ahead is daunting, it is important to acknowledge progress and look at things one piece at a time. Each small step we take chips away at such enormous problems and gets us closer to the other side. Even though it is overwhelming to try to envision what the economy will look like in the coming months, let’s reflect on the progress we’ve made. The curves are bending and the projected loss of life is lower than initial estimates. One life is too many, but our efforts are making a difference!
The S&P reached a cycle low on March 23rd (a breathtaking peak to trough decline of -34% in the course of one month) as the pandemic accelerated around the world and many developed countries shut down their economies to control the spread. Social distancing remains in place and the extent of the damage done to the economy and corporate finances remains largely unknown, but massive fiscal and monetary policy has been enacted to support individuals, businesses, and the economy.
This week the surreal market moves continued. Global stocks have now rebounded 20% off of the cycle lows but are still down -18% year-to-date, while the bond market has provided some stability up 3.4%. Our enthusiasm regarding the stock market’s rapid move higher is tempered. We believe that we will eventually win the battle against this virus, but the timing of that is uncertain, so we should expect more near term volatility.
Recently investors have been keenly focused on the results of social distancing, looking for a sign of peak case growth as this is one important step towards gradually beginning to open up the economy. This week equities marched higher as data suggested containment measures are working and coastal states in the US should be nearing a peak. This leg higher has also been driven by the massive scale and breadth of policy support including the expanded programs announced by the Federal Reserve on Thursday morning. One policy analyst noted, “The Fed is at war against the virus and this is a wartime degree of commitment to credit policy.” These measures are crucial so current conditions don’t morph into larger systemic problems.
As we begin to anticipate what lies ahead in the coming days and weeks, all eyes will be focused on parts of the world that are ahead of the U.S. curve. These economies are beginning to open back up and your team at APCM is monitoring the trend in new cases for a sign of a second wave. How much pessimism a second wave in Asia generates depends on when it occurs relative to how far along vaccines and treatments are. If containment measures prolong the timing of a second wave, and there are signs of progress towards a viable treatment and eventual vaccine, then a second wave may not be as harmful to market sentiment. But investors will become less optimistic if there are no viable drugs for treatment on the horizon, which would increase the threat of rolling economic lockdowns and require significantly more stimulus. Having said this, it’s important to remember that this is a global problem and all the brightest minds are working tirelessly to find a pharma solution. We are not betting against human ingenuity, each passing day is helping health experts determine effective containment programs and eventually there will be a pharma solution. In the meantime, controlling the spread, monitoring the economic damage relative to offsetting stimulus, and preparing portfolios for more near term volatility will be very important.
There are other near term risks that are not directly tied to the number of COVID cases. The economy is shut down, businesses are closed, and consumer spending has come to a screeching halt. We know the economy is plunging, U.S. unemployment in April is likely to surge to 15% or more. This is why we have seen global policy makers announce almost 300 stimulus measures over the past several months. Stimulus measures are attempting to offset the hit to the global economy, so the virus shock does not morph into a structural bear market similar to the Global Financial Crisis. Both credit and equity markets have bounced back with full knowledge that the global economy is plunging. At the moment, massive stimulus has the upper hand. It’s likely to go back and forth, but at present we think that massive stimulus will win.
As we peer into the coming weeks note that opening up the economy will be a “process” not an “event” and with it will come new challenges, risks, and opportunities. Be patient, brighter days will come!
Brandy Niclai, CFA®
CIO – Multi-Asset Strategies
4/10/20
